The reason the Sensex is reaching new peaks is because of dollar inflows, and also the expectation of a rate cut by the RBI

Next month we celebrate seventy years of independence. There’s a lot to celebrate. In the coming weeks, look for many insightful columns and long articles on India at 70. For now, as a run-up to our big birthday bash, let’s look at the economy. How are we doing? On one hand (economists always say “on one hand”, get used to it!) the growth rate is a modest, not-so-bad 7 plus per cent. Inflation is low, and the latest number for June is below 1per cent. This is the wholesale price index based inflation. Inflation is low because of decline in food and petrol prices.

Low inflation may continue for a few months, although the impact of the Goods and Services Tax (GST) may be marginally inflationary. Even if GST adds pressure, the WPI or CPI based inflation will be below 5, which by India’s standards is quite good. The low inflation is creating expectations that the Reserve Bank of India may decrease interest rates and bring joy to home loan borrowers (more about this later). The exchange rate also remains strong. The rupee per dollar rate has gone down from 68 to 64.

This means that if you are holidaying abroad or sending fees for your ward studying in a foreign university, you are a happy camper. But it also means that imports are becoming cheaper. This is reflected in monthly trade data. Our exports grew by only 4 per cent last month, whereas imports surged by 19 per cent. If imports rise much faster than exports, our trade deficit will widen. As such our exports are still below what they were four years ago.

We need our exports to grow at the rate of 20 per cent per year, to be able to achieve the targets set in our ambitious Foreign Trade Policy. For instance, in garment exports, which should be our forte, we are far behind much smaller countries like Bangladesh and Vietnam. Much left to do here. The rupee getting stronger isn’t helping our exporters. The strong rupee is also a magnet for inflow of dollars into the stock market. If you bring in 100 dollars, convert them to rupees and gain (say) 15 per cent on the stock market in a year when rupee is stronger by 5 per cent, then your total return on 100 dollars is 20 per cent.

Nowhere else in the world can a dollar investor hope to earn 20 per cent on his investment. The reason the stock market is reaching new peaks is because of dollar inflows, and also the expectation of a rate cut by the RBI (as mentioned above). So these are the positives: 7 per cent growth, low inflation, strong rupee, rate cut expectation and surging stock market. What is there to worry? Here the economist says “on the other hand”. The glass is only half full. Despite low inflation and good growth outlook, the capital investment in new capacity, new factories, is very low. Private capex growth is the lowest it has been in two decades.

This will adversely affect our future growth. Along with low investment, even job growth is nowhere as robust as expected, or as needed. Of course, the data on jobs is notoriously unreliable. Ninety percent of the workforce is in the informal, i.e. unregistered, sector. This includes farm labour, people who work in your house as maids and cooks and even the courier guys. Certainly there must have been an increase in informal employment but that is of low quality. Jobs which are “permanent” in nature, or come with health insurance and pension benefits are not growing.

This is indeed our biggest challenge - how to grow jobs and entrepreneurs. Alongside we also need to worry about our banks. They are saddled with bad loans which impedes their capacity to give fresh loans to new entrepreneurs and home loan borrowers. Then there is the loan waiver phenomena. It is increasing fiscal burden, causing the state governments to cut down on development and infrastructure spending. So the negatives are low capex, anaemic job growth, stressed banks and tight fiscal conditions. So as India approaches 70, the glass is half empty and half full. Two cheers to that.

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